The Ninth Circuit will have an opportunity to decide whether Section 22(a) of the Securities Act of 1933 bars removal of lawsuits related to bankruptcy under Section 1452(a).
A district judge in San Francisco certified the question for an interlocutory appeal to the Ninth Circuit. The issue arises in the bankruptcy of renewable energy producer SunEdison Inc.
The Second Circuit is the only federal appeals court to tackle the question so far, and it held that the bankruptcy removal power trumps Section 22(a).
Plaintiffs brought four suits in California state court against SunEdison, its officers and directors, and underwriters, alleging violations of the securities laws due to alleged failure to disclose certain facts pertaining to the company’s financial condition.
After SunEdison filed a chapter 11 petition in Manhattan in April, the company removed the suits to federal district court in San Francisco and filed a motion to transfer to the Southern District of New York for referral to the bankruptcy court. The plaintiffs responded with motions to remand to state court. The automatic stay halted the suits against the company.
The issue turned on Section 22(a) of the Securities Act of 1933, 15 U.S.C. Section 77v(a), which bars removal of suits alleging violations of the Act, except for specified class actions. The plaintiffs contended that the suits must be remanded because the section made removal improper.
In his opinion on Aug. 26, District Judge William Alsup decided to follow the Second Circuit, which held in 2004 in the wake of the bankruptcy of WorldCom Inc. that a general statute like Section 22(a) cannot nullify a specific statute like the bankruptcy removal provision in Section 1452(a).
Because there is a dearth of other appeals court authority, Judge Alsup certified the question to the Ninth Circuit under Section 1292(b). Assuming the circuit court accepts the interlocutory appeal, Judge Alsup stayed the suits pending resolution of the appeal.
Employing the Third Circuit’s Pacor analysis, Judge Alsup also held that removal was proper under Section 1452(a) because SunEdison’s indemnification obligations in favor of the officers, directors and underwriters lead to a conceivable effect on the bankrupt estate.
The judge also ruled that the convenience of the parties and the interest of justice warranted transfer to New York under Section 1412.
Given how long it takes for appeals to navigate the Ninth Circuit, the SunEdison bankruptcy may be concluded long before the appeals court rules. Having lost the motion to remand in district court, the plaintiffs may have effectively lost their suits because SunEdison might propose and confirm a plan that provides so-called third-party releases to the defendants.